Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

BEC III > 2-1. Financial Valuation > Flashcards

2-1. Financial Valuation Flashcards

1
Q

What is valuation?

A

Process of assigning worth or value to something.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is financial valuation?

A

Process of estimating the FV of an asset, liability, or an entire business.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is accounting FV?

A

The price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are technical tools needed for valuation?

A

Analytical, software, judgment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is judgment required to do?

A
  • Understanding purposes and context of valuation
  • Select appropriate quantitative techniques and data
  • Assign value - measured in money
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

For what is the value determined?

A

For specific items:

  • Separate asset, liability or equity item
  • Group of assets, liabilities or entire business
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What must value take into account?

A

Attributes of item being valued; including condition and location.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the time for value?

A

Measurement date.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are US GAAP hierarchy of inputs?

A

Level 1 - highest and bet inputs
Level 2
Level 3 - lowest and least desirable inputs, with most assumptions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is level 1 inputs?

A

Unadjusted quoted prices obtained at the measurement date in active markets for assets/liabilities identical to those being valued
*Quoted price in active market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is level 2 inputs?

A

Observable for the item being valued, either directly or indirectly, but are other than quoted prices described in level 1, including:

  • Quoted prices for similar, but not identical item in active market
  • Quoted prices for similar item in market that is not active
  • Inputs other than quoted prices that are observable for the item being valued (interest rate, credit risk, yield curves, default risk)
  • Inputs derived principally from, or corroborated by, observable market data by correlation or other means
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is level 3 inputs?

A

Unobservable for item being valued.

  • Entity’s assumptions used
  • Entity’s internal data
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are 3 approaches to develop FV by GAAP?

A

Income approach, Market approach, Cost approach

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is market approach (also called Comparison Approach)?

A

Uses prices and other relevant info generated by market transactions for items identical or comparable to item being valued.
Ex: establish value of a house from preexisting house or building

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is income approach?

A

Uses valuation techniques to convert future amounts of economic benefits or sacrifices of economic benefits to determine what the future amounts are worth at valuation date.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Income approach: what are techniques used?

A
  • Discounted cash flows
  • Option pricing models
  • Earnings capitalization models
  • etc
17
Q

What is cost approach? What is this also called?

A

Uses valuation techniques to determine the amount required to acquire or construct a substitute item.
More limited than other 2 approaches.
Also called, Replacement cost approach and Reproduction cost approach.

18
Q

When may cost approach be especially useful?

A

For specialized item.

19
Q

What are active markets? What is the FV?

A

Stock market, bond market, commodities market, currency market, Over-the-counter market etc.
FV = Active market price for identical item

20
Q

What is inactive market?

A
  • Few relevant transactions are available
  • Prices are not current or vary substantially
  • Little publicly available info
21
Q

What are examples for when level 2 inputs are used?

A
  • Stock restricted from trading, but similar to traded shares
  • Securities traded in brokered markets rather than public market
  • Residential and commercial property with comparable sales
  • Private debt securities fro which there is publicly traded debt with comparable risks and terms
22
Q

What are examples of level 3 inputs?

A
  • Expected cash flows
  • Expected life of an asset etc
  • Expected residual value
  • Likelihood of events occurring
  • And similar estimates
23
Q

When is level 3 input used?

A

*Asset retirement obligations
*Financial assets servicing rights
*Capital project
*Closely held businesses
etc
Lots of assumptions and estimates

24
Q

CAPM: What does this stand for>

A

Capital Asset Pricing Model.

25
Q

CAPM: what is it?

A

An economic model that determines the relationship between risk and expected return and uses that measure in valuing securities, portfolios, capital projects and other assets.
The relation measure is used in valuing various assets.

26
Q

CAPM: What does it incorporate?

A
  • Time value of money - using risk-free rate of return

* Element of risk - using risk measure called “beta”

27
Q

CAPM: Formula?

A

RR = RFR + beta(ERR - RFR)

RR=required rate of return
RFR=risk free rate of return = rate on US government bond
beta=measure of volatility of asset being measured (i.e. a measure of risk)
ERR=expected rate of return -benchmark rate for the class of asset being valued.
28
Q

CAPM: ex: RFR=3%, beta=2, ERR=10%. RR?

A

RR=0.03+2(.1-.03)=0.17=17%

29
Q

CAPM: what is beta?

A

Measure of systematic risk as reflected by the volatility of an investment or other asset.

30
Q

CAPM: what is beta technically?

A

[(asset standard deviation)[a] / (benchmark standard deviation) [b] x coefficient of correlation between [a] and [b]

31
Q

CAPM: what are 3 states of possible beta?

A
  • beta = 1
  • beta > 1
  • beta < 1
32
Q

CAPM: what is beta = 1?

A 
Asset being valued moves in line with benchmark.
It has the same level of systematic risk as the class of asset.
33
Q

CAPM: what is beta > 1?

A 
Asset being valued moves greater than benchmark.
More volatile (more systematic risk) than that class of asset.
34
Q

CAPM: what is beta < 1?

A 
Asset being valued moves less than benchmark.
Less volatile (less systematic risk) than that class of asset.
35
Q

CAPM: what are assumptions and limitations?

A
  • There is an asset class and benchmark for the asset being valued.
  • All investors have equal access to all investments of the class being valued and all use a one-period time horizon.
  • Asset risk is measured solely by variance of the asset being valued from asset class benchmark.
  • No external cost involved - no commission, tax etc
  • No restrictions on borrowing or lending at the risk-free rate = all parties can do so.
  • Uses historical date, which may not be appropriate for computing future returns.
36
Q

CAPM: what is the uses?

A
  • Securities analysis
  • Capital budgeting: company beta or industry beta used as surrogate for project beta
  • Setting fair compensation for regulated monopolies
37
Q

CAPM: what does a graph of beta indicate?

A

Relationship between asset return and benchmark return

BEC III (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions